At Epic Trust Investment Advisors, we often help people through financial crises. This includes anything from divorce or the death of a spouse or parent to the loss of a job or even receiving a financial windfall. During my career, I’ve seen people make damaging financial mistakes during times of stress or change. Since major life transitions happen to all of us, it’s important to prepare your finances in advance and be ready to take the appropriate steps to avoid making decisions you may regret.
Before you make any big financial choices, consider the tips below and get professional support from an expert you trust during any time of crisis.
1. Don’t Make Important Decisions Under Stress
Regardless of whether you’ve lost a job, a parent, or a spouse, it’s important to take six months to a year before making any big decisions, such as selling a house or making a large purchase. Research shows that people are more likely to ignore long-term consequences when making decisions under stress. (1)
2. Don’t Sell Assets Without Your Advisor’s Help
Often, financial crises require funds to take care of issues that arise. However, it is critical to avoid liquidating assets without the advice of a financial advisor. Selling investments and making withdrawals can create tax liabilities and may incur fees and penalties. Pressure to sell large assets like real estate can result in a lower sale value and sometimes can contribute to unintended or costly tax mistakes.
Your advisor can help you evaluate all of your assets and decide which ones to liquidate first, even helping you delay the sale of larger assets so that you can get a fair price.
3. Consider Taxes, Penalties, and Fees
Investors under stress often sell investments without thinking and end up with hefty tax bills, fees, and penalties at the end of the year. It’s critical to understand the tax treatment of any withdrawal you make and the associated fees.
For example, if you withdraw funds from a tax-qualified retirement account before you are 59½, you will generally owe ordinary income tax on the distribution and a 10% penalty. However, some expenses are exempt from the penalty, so it’s important to consider whether your expenses qualify.
Many investments, like life insurance policies and annuities, may have substantial early withdrawal fees to consider. When you consider fees or penalties, it may make more financial sense to sell a different asset while you wait for potential penalties to be lower. A competent advisor should understand the intricacies of how these insurance contracts work and can coordinate advice with a CPA to give you a strategy that will reduce the taxes, fees, and the penalties you could pay. In some cases, it’s been my experience that this type of planning can save tens of thousands of dollars in mistakes that in most cases can be avoided with the proper advice.
4. Get A Second Opinion
In a time of grief, shock, or stress, your decision-making may be compromised and your mental state could be foggy. Unfortunately, there are people out there who take advantage of those who are at a vulnerable point in their life. With financial decisions, just as with medical procedures, it’s important to fully understand the risks and benefits of any option you’re considering. We recommend getting a second opinion before you make an irrevocable financial choice – especially if you haven’t had prior experience working with an advisor.
5. Don’t Do Nothing
While it’s important to take your time when making major financial decisions, and this piece of advice may seem to contradict prior points, there is also a danger in doing nothing. Not taking action can be risky if your assets are invested too aggressively or are losing value. Being paralyzed by fear may only increase your financial stress. Evaluating your options and understanding the risks can help you feel more confident and informed.
Doing nothing can also leave you at risk of certain penalties. If you are over 70½ and fail to take the required minimum distribution (RMD) from your IRA, you will pay a penalty of 50% of what the distribution should have been. If you don’t need the money from your RMD to cover expenses, you can reinvest the funds and may be able to defer paying taxes if you put it towards a qualified investment. Working with your advisor may provide a strategy to reduce your overall taxes.
One of the most difficult parts of my job is when I meet with people who have made financial decisions they regret. At Epic Trust, we want to serve as your teacher and coach, helping you feel more confident and clear about your current and future financial status. If you or someone you know is going through a financial crisis or transition, encourage them to take their time and understand their options and get the guidance of a trusted professional. For a no-obligation consultation, give my office a call at 509-591-0014 or email me at [email protected].
Jeffery Lewis is the president of Epic Trust Investment Advisors and a financial advisor with more than a decade of industry experience helping clients prepare for their financial futures. Serving as a financial advocate and coach, he strives to help pre-retirees prepare for a long retirement with a predictable monthly income and help people use money as a force for good and to spend it in the service of others. Along with his degree in business management, Jeffery is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor®. To learn more about Jeffery, connect with him on LinkedIn or send him an email at [email protected].